Competence to Contract

Introduction

Just about every transaction that we enter into on a day-to-day basis is predicated on a contract. To exemplify, when we purchase a ticket to spectate a motion picture or a sporting event or purchase groceries from a grocer, we enter into a contract.

However, a legal fact that is often disregarded is that for a contract to be binding both parties to a contract have to be competent to enter into a contract. This becomes especially salient when one of the parties to a contract commits any default and has to be made liable in pursuance of the terms of the contract. This article thereby has the objective to explore the essential prerequisites of entering into a contract to gain a bird’s eye understanding of the same.

Some legal prerequisites for entering into a contract

  1. Majority prerequisite:

The principal enactment governing the Law of Contracts in India is the Indian Contract Act, 1872, (hereinafter referred to as “enactment” or “Act”). Section 11 thereof prescribes the age prerequisite which a person is expected to meet in order to be deemed competent to enter into contracts in India –

“Section 11. Who are competent to contract Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind […]”

It ought to be noted that within the territorial contours of India, the principal statute pertaining to the age of majority is the Majority Act, 1875. Section 3 thereof prescribes the age at which an Indian domicile attains majority –

“Section 3. Age of majority of persons domiciled in India ­– (1) Every person domiciled in India shall attain the age of majority on his completing the age of eighteen years and not before. […]

2. ‘Soundness of mind’ prerequisite:

Section 12 of the present enactment prescribes the mental prerequisite which a person is expected to meet in order to be deemed competent to enter into contracts in India –

“Section 12. What is a sound mind for the purposes of contracting – A person is said to be of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests. […]”

The gist of the above-stated provision is that a person entering into a contract can said to be of sound mind when, at the time of entering into a contract, the person has the capacity of understanding or assessing his/her actions and being cognizant of the ramifications of obligations pursuant to the terms at the time of entering into a contract.

Some legal disqualifications

In accordance to the provisions of the enactment thereby, those persons who do not meet the above-stated prerequisites are not competent to enter into a contract under the law.  

  1. Minority disqualification

As aforementioned, within the territorial contours of India, any person who has not attained 18 years of age is deemed a minor. A minor has been deemed under law to be incapable of understanding or assessing the obligations pursuant to the agreement. Thereby, the law deems a contract with a minor to be void ab initio (i.e., void from the beginning) and unenforceable in a court of law.

Consequently, a party which has entered into a contract with a minor, cannot compel the minor to perform his portion of the obligations pursuant to the agreement.

In Mohori Bibee v. Dharmodas Ghose, where the respondent-minor had mortgaged his property in favor of the moneylender with a view to securing a loan, the Privy Council held that as contract with a minor is void ab initio and as Section 7 of the Transfer of Property Act, 1882, prescribes that a person who is competent to transfer a property is a person competent to contract, the mortgage deed executed by the respondent-minor is void.

However, if a minor enters into a contract and performs his portion of the obligations pursuant to the agreement, the second contracting party may be compelled to perform its portion of the obligations, and, thereby in such cases, the contract stands enforceable by law.

In A.T. Raghava Chariar v. O.A. Srinivasa Raghava Chariar, where a mortgage executed in favour of a minor was held to be enforceable by the Court as the minor had extended the sum of money which formed the consideration for the promise of the mortgagor (who was of competent age) and had thereby performed his portion of the obligations under the mortgage deed.

Furthermore, a minor may not enter into an agreement and subsequently upon attaining majority provide his consent thereto. The ratio underpinning the same being that since a contract with a minor is void ab initio, subsequent ratification of such an agreement by a minor cannot make it enforceable under the law.

In Suraj Narain Dube v. Sukhu Ahir, wherein the respondent-minor executed a promissory note against the borrowed sum in favor of the plaintiff and four years later when the respondent-minor attained majority a second promissory note was executed in favor of the plaintiff in respect of the principal borrowed sum in addition to the interest which had swelled. The Court held that the first agreement that was entered into between the parties when the respondent was still a minor is void due to want of competency, however, since the minor had made a promise and had executed a promissory note pursuant to that, it formed a valid consideration. The Court held the second promissory note to be void due to want of consideration from the plaintiff as the principal sum was no consideration for a second agreement.

2. Unsoundness of mind disqualification

As also aforementioned, within the territorial contours of India, any person incapable of understanding or assessing his/her actions and not being cognizant of the ramifications of obligations pursuant to the terms at the time of entering into a contract is said to be of unsound mind.

However, even a person who is usually of unsound mind, but occasionally of sound mind, may enter into a contract when he is of sound mind. Likewise, a person who is usually of sound mind, but occasionally of unsound mind, may not enter into a contract when he is of unsound mind.

In Musammat Amina Bibi And Anr. v. Saiyid Yusuf And Ors, wherein the Court held a lease agreement to be void because one of the parties to the agreement was of unsound mind while entering into the agreement.

Conclusion

It is absolutely essential to ensure that all parties entering into a Contract are legally competent to enter into a contract. This is especially salient when it comes to enforcement of the terms pursuant to the contract and/or making a party liable for breaches that committed. Laxity in ensuring that the parties entering into a contract meet all essential legal prerequisites for entering into a contract can render it unenforceable thereby causing pecuniary losses.  

Sources

  1. The Indian Contract Act, 1872, No. 09, Acts of Imperial Legislative Council, 1872.
  2. The Indian Majority Act, 1875, No. 09, Acts of Imperial Legislative Council, 1875.
  3. Mohori Bibee v. Dharmodas Ghose, (1903) ILR 30 Cal 539 (PC).
  4. A.T. Raghava Chariar v. O.A. Srinivasa Raghava Chariar, (1916) 31 MLJ 575.
  5. Suraj Narain Dube v. Sukhu Ahir, AIR 1928 All 440.
  6. Musammat Amina Bibi And Anr. v. Saiyid Yusuf And Ors, 70 Ind Cas 968.
  7. Anuradha Goel, Capacities of Parties entering into a Contract, IPleaders (Mar. 10, 2022, 3:34 PM), https://blog.ipleaders.in/capacity-contract-ica-1872/#Suraj_Narain_Dube_vs_Sukhu_Ahir

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